A case of “be careful what you wish for” in post-election Malaysia

After the euphoric defeat of Malaysia’s incumbent coalition in May’s general election now there comes a reality check on numerous levels

Viewpoint

AFTER the euphoric defeat of Malaysia’s incumbent coalition in May’s general election now there comes a reality check on numerous levels.

It might not be a case of “be careful what you wish for” although there are no doubt quite a few individuals in the country’s populace - the rakyat which has had to sit through the erosion of its purchasing power amidst the stream of allegations stemming from the apparent grand malfeasance at development fund 1MDB - who are delighted to have seen former prime minister Najib Razak arrested and arraigned in court as he was last week, no matter what the consequences.

By “consequences” I mean what is likely to be a period of less than salubrious circumstances for the Malaysian economy, its capital markets and political stability.

A large swathe of Malaysia’s populace believe that Malaysia’s fortunes were on track to sustained decline should Najib have won the general election.

Not only does what we now know about the country’s deteriorating finances - 1MDB’s debt, mounting government-related borrowing and contingent liabilities via guarantees - tell us that, but the drift towards authoritarianism and increasing racial and religious antipathies which were the expanding hallmark of the Najib regime pointed to a regressive dynamic.

Malaysia has every reason to be the progressive jewel of South East Asia. It has a wealth of natural resources, a well-educated workforce and history over the last thirty years of rapid industrialization which has beckoned to developed nation status.

Whilst the rampant corruption which was endemic to the Najib regime - the phenomenon has always been there in Malaysia but not on such as grand scale - undoubtedly put a drag on this story of transformation, I believe, as I have stated in previous columns, that the election victory of the Pakatan Harapan coalition will prove auspicious for the country’s fortunes.

In the long run, that is. Over the short to medium term there will be stress and pain.

Foreign investors have been pulling out of Malaysian debt and equities since the election victory, based on revelations about the country’s previously understated debt pile, fears of execution risk in the neophyte administration and amid a rebalancing away from emerging market risk to developed markets against a backdrop of US interest rate tightening.

Over US$3bn-equivalent of Malaysian onshore debt was dumped in May and Malaysia credit default swaps have widened around 30bp since the election result wa announced on May 9.

And it doesn’t help that Malaysia is caught in the cross-hairs of the growing US-China trade war, based on its status as an on-shipper of Chinese produced exports.

Moreover it doesn’t help that the Najib camp, whilst mired in a raft of allegations surrounding the outrageous extravagance of those supposedly caught with their hands in the 1MDB till, is clearly not going to succumb without a fight.

Najib’s PR machine has been on the offensive ever since the election shock and are setting up the former PM as some kind of lamb sacrificed on the altar of political revenge. There is still a rump of support for the man among the rural Malay population that may yet foment unrest.

It would be ironic if the return of Mahathir Mohammad to the post he last held when Malaysia was slowly emerging from the grip of the Asian financial crisis in the early 2000s were to herald a dangerous wave of capital outflow along the lines of that debacle.

There are already whispers in Kuala Lumpur of the possible imposition of capital controls and even a return to the pegging of the ringgit against the US dollar - a Mahathir-led innovation. The latter seems unlikely for now. But it seems to me the stage is set for Malaysia to become the flash-point for a re-rating of emerging market securities in the Asian region.

In the longer term, if the reform - “reformasi” - programme he has promised, is executed, Malaysia’s prospects look bright. But in the shorter term, it might indeed be a case of be careful what you wish for.  

Date

10 Jul 2018

Channel

Capital Markets

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